Whenever discussions on the automotive conglomerate arise, invariably attention turns to DRB-Hicom Bhd. Its sprawling automotive complex in Pekan, which assembles cars for Mercedes-Benz and Volkswagen, has grown from strength to strength, either organically or through acquisitions.

DRB-Hicom's revenue has more than tripled to RM12bil since the takeover in 2004, with its net profit at RM1.32bil in financial year ended March 2013. It was a surge in profits after recognising RM971mil negative goodwill from the acquisition of Proton, while operating profit improved 11% to RM534mil from a year ago.

As at the week's close of RM2.75, it trades at a price to earnings ratio of around 8 times, seemingly cheap for a company of such proportion with key strategic assets like Proton and Pos Malaysia Bhd.

With its underperforming share price, it's now at a substantial discount of 23% to its net tangible asset per share at RM3.60 which translates to RM7bil. While its total assets stand at RM40bil, and borrowings at RM6.2bil.

Five out of eight research houses tracked by Bloomberg have a "buy" call on the company, with a consensus target price of RM4.

Those numbers have not gone unnoticed, as foreign funds have been accumulating its shares, with its foreign shareholding for the floated shares standing at 19.65% as at Dec 2013, compared with just 11.62% recorded in Dec 2010.

It counts Norwegian fund like Skagen AS and Norwegian bank Norges Bank among its top five substantial shareholders, while BlackRock, the world's largest fund manager, also has a stake in the company.

However, similar to its recently acquired unit, national carmaker Proton Holdings Bhd, it suffers from a perception problem with investors shunning the stock due to the "perceived" political risk, while Proton has a "subpar" value attached due to its legacy issues.

While group managing director Tan Sri Mohd Khamil Jamil skirted the question about perception at a media excursion to Sabah recently, he concurred that change is the only constant with more rationalisation and synergies reaped within the group, before markets recognised the value of the company.

It was also a vindication of sorts two weeks ago when a Proton Preve was involved in a high speed collision, that even flipped the car a few times on the East Coast Expressway, with the engine dislodged. Many ridiculed the quality of Proton when pictures of the accident went viral on social media, but the main point is that the lady driver escaped unscathed, partly due to sheer luck and the quality improvements on certain manufacturing processes and body structure.

In layman terms, it would take more than 150 tonnes of force per sq m to deform a part with 1,500 MPa in tensile strength.

"The engine and rear roll mount was designed to detach upon serious impact. The accident shows the quality of the car as the driver could still open the doors to leave the car, showing the integrity of the side structure, even after an impact.

"It could be worse if the engine is still in the crumple zone, which can end up being pushed into the cabin area," he said.

Proton is slated to introduce a new car, codenamed P2-30A or the Global Small Car, in April, the first complete new creation since the takeover by DRB-Hicom two years ago.

Air support

On a broader picture, Khamil in his presentation to the press in Sabah last weekend highlighted its two newly acquired jewels, Composites Technology Research Malaysia Sdn Bhd (CTRM) and Konsortium Logistik Bhd (KLB) as the growth impetus for the company going forward.

CTRM has an outstanding orderbook of RM5.68bil which would keep it busy until 2020, with giant aircraft makers Airbus and Boeing being its main customers.

But DRB-Hicom is not looking at just the aviation industry but to synergise with its defence unit and even national carmaker Proton.

"Composites represent a huge opportunity, as certain parts could be manufactured to reduce weight while still maintaining the rigidity of the body panels. CTRM will give us another dimension to the automotive supply chain, even though Proton's unit Lotus have some light weight solutions," Khamil says.

DRB-Hicom bought CTRM in November last year for RM298mil in a deal with the Ministry of Finance. Currently, CTRM derives about 90% of its revenue from the manufacturing of aircraft composites at its plant in Batu Berendam, Melaka.

"CTRM's order book is enormous and it's growing, but I'm not just looking at the aerospace industry.

"As we move into lightweight bodyparts, composite materials would play a major role as the usage in the automotive sector for instance could reduce weight by 20%, hence producing a more energy-efficient vehicle, " he says.

Khamil says there are about 34,000 ordered aircraft to be manufactured worldwide, and as a super Tier-2 supplier to the aviation industry, major aircraft players would ultimately come to CTRM to manufacture parts for these aircraft.

"CTRM would give us the impetus and provide us the strength and infrastructure to improve our automotive and defence industry."

Its defence arm, Defence Technology Sdn Bhd (DefTech), would also start to recognise earnings contribution this year from its RM7.55bil 8x8 wheeled Armoured Vehicle (AV8) project.

Commissioned by the government for the Malaysian military, the project will involve the design, development and manufacture of 257 AV8s, with production peaking in 2016 and 2017. The first AV8 will be rolled out by the middle of this year.

When Khamil sees a fragmented business, he sees an opportunity. That was what happened when DRB-Hicom recently launched a RM392mil takeover for KLB. The takeover is expected to completed this quarter.

"Our goal is to make KLB the number one logistics provider as the logistics business in the country is very fragmented. Nobody does an integrated logistics business.

"Looking at DRB-Hicom, our strength is the diversity that we have, and our first mark would be KL Airport Services Sdn Bhd, and the last mark being Pos Malaysia Bhd. The in-between would be KLB," he says.

Currently, KLB is the primary logistics provider for Proton, and business from Proton alone amounts to RM100mil annually.

KLB recorded a loss of RM279,000 for its nine-month period ended Sept 30. It chalked up revenue of RM217mil.

"With KLB's enormous warehousing capacity of 1.4 million sq ft, and Pos Malaysia's 700 touch points in the country, I'm sure we would be the number one logistics provider in the country. Most of the products within Malaysia are moving to Singapore, and I believe that about 50% of the country's goods are currently centred towards Singapore" he says.

Top logistics player

With that, KLB's strongest territory is in the southern part of the country, and its competitive advantage stems from its position as a top integrated logistics player.

KLB is also expected to ride on the growth of the local logistics business. According to Frost and Sullivan, the national logistics revenue is projected to grow to RM196bil from RM146.5bil.

Meanwhile, the company is still hiving off more non-core assets, with its recent RM518mil divestment of its entire stake in Uni.Asia Life Assurance Bhd to Pramerica BSN Holdings Sdn Bhd.

It is also expected to pare down its 70% stake in Bank Muamalat to 40%. Its gearing ratio stood at 0.8 times as at September 2013, and the company still has room to take on more as it has a self-imposed gearing ratio of 1.25 times.

However, prudence is the mantra as chief financial officer Ahmad Fuaad Kenali mentioned that the company would only look at investments that offer a minimum 12% to 15% internal rate of return.

Khamil has set a target for the group to reach a revenue of RM17bil by 2015.

BANGKOK: Thai stocks retreated on Friday as investors cut some risk exposure after a blast at an anti-government protest rally, with most others in Southeast Asia rangebound amid Asian stock market weakness and downbeat results on Wall Street. Thai SET index finished down 0.5 percent on the day,trimming its gain on the week to 3.2 percent. It was among theregion's outperformers on the week, helped by bargain hunting ina reporting season, including banking shares. An explosive device wounded 28 anti-government protesters inthe Thai capital on Friday and other violence was reported afterseveral days of relative calm when the movement appeared to berunning out of steam. Vietnam was the region's bright spot. The benchmark VN Index climbed 1.88 percent, extending its winning streak to 11sessions. It was up 4.8 percent on the week, Southeast Asia'sbest, ahead of Indonesia's 3.7 percent weekly gain.

LONDON: Royal Dutch Shell issued a "significant" profit warning on Friday, detailing across-the-board problems and the extent of the challenges facing the oil major's new boss Ben van Beurden, who took over two weeks ago.

The warning comes nearly 10 years to the day after Shell, the western world's No. 3 oil company, revealed the so-called reserves accounting scandal, when the group dramatically downgraded its reserves estimates.

It also follows a similar warning from Chevron Corp, the second-largest U.S. oil company, last week and reflects how the industry is having to grapple with replacing reserves, lower oil prices and the need to control costs.

"Our 2013 performance was not what I expect," van Beurden said, announcing a cut in forecasts to fourth-quarter earnings excluding identified items on a current cost of supplies (CCS) to $2.9 billion (1.76 billion pounds), from market expectations of about $4 billion.

The last time the Anglo-Dutch firm reported an adjusted earnings figure as low as $2.9 billion was in the fourth quarter of 2009. Since then the main operating metric has averaged $5.6 billion per quarter.

Analysts said Shell appeared to have suffered a perfect storm in the last three months, due to weak refining profit margins, higher production costs, output stoppages in Nigeria and a weakening of the Australian dollar.

However they noted that the detailed warning would also enable the new CEO, who has been at Shell since 1983, to use the results day on January 30 and a Management Day in March to set out his new strategy.

"This should bring to an end what has proved to be something of an "annus horribilis" for Shell which has seen a key production target missed and weaker than anticipated profitability in North America," Barclays said in a note.

Shell, which dates its history back to 1833, also missed forecasts for its third-quarter trading in October.

One British-based shareholder who asked not to be named said no one was that surprised, even though the number was bad. He said it would increase pressure on the new chief executive to keep a tighter control on costs.

"There's quite a bit of expectation building for when they have their full-year results and their management day ... to chart a course which leads to more free cash being generated and ultimately better growth in dividends for shareholders.

"This warning is a reminder that there are some big structural problems."

SHELL SHOCK

Shares in the group fell more than 4 percent at the open but at 1115 GMT were down only 2 percent. Shares in rival BP, No. 5 among investor-controlled oil and gas groups worldwide, were down 0.4 percent.

Shell's stock, up 1 percent over the last twelve months, has lagged Britain's blue chip index, which is up 12 percent over the period, and also its nearest rival BP, up 7 percent.

"Shell's profit warning is a confirmation of the impact of the downward trend in oil prices we've seen," said Carsten Fritsch at Commerzbank. "In particular, the refined product markets in Europe have been very weak."

International oil prices have averaged about $110 a barrel for the past three years. Booming shale oil production in the United States has helped lower prices there, however, and delivered a competitive advantage to many U.S. refineries.

The United States has also become a major exporter of gasoline and diesel, further hitting profit margins at refiners in Europe and Asia. While Shell has a number of refineries in North America, about two-thirds of its refining operations are in Europe and the Asia-Pacific.

The group's weak performance was also due in part to outages in its liquefied natural gas (LNG) sector.

"With nearly a fifth of its LNG portfolio down for maintenance, the final quarter of 2013 was never likely to be a good quarter for Royal Dutch Shell," said Barclay's, but it added that the company remained its 'top pick for 2014' as it still had a strong free cash flow position.

It became a leader in liquefied natural gas under van Beurden's predecessor Peter Voser, who rebuilt the oil company following the reserves accounting scandal.

TIGHTER CONTROL

Voser, who became finance director during the 2004 reserves crisis and CEO in 2009, believed fervently that an oil major needed to continue to invest throughout an economic cycle, rejecting calls from investors and analysts to cut back.

Since van Beurden started working with Voser in Q4 however the firm has cancelled plans to build a gas-to-liquids plant in the United States, raising investor hopes of tighter spending.

Van Beurden appeared to confirm that approach on Friday.

"Our focus will be on improving Shell's financial results, achieving better capital efficiency and on continuing to strengthen our operational performance and project delivery," he said.

Van Beurden took the top job with little board-level experience but broad company exposure and first-hand knowledge of the gas technology on which it has bet its future. He was the head of refining when promoted to the top job.- Reuters